Jordan Craw
Jordan Craw

Ever written something and upon reading it later realize you didn’t say quite what you meant to? Well that’s exactly what happened recently with my previous article on the hidden foreign exchange risks that often exist in trading instruments based in a currency other than your own.

The article states that someone in Australia would have lost money holding gold futures during 2009 (excluding roll-over and brokerage). What it should have said was that anyone from Australia holding the Gold (GOLD:ASX) Exchange Traded Fund would have lost in 2009. The movement of this ETF compared to a rolling spot month composite of gold futures can be seen in chart 1 below.

click chart for more detail
click to enlarge

The cause for the difference in performance can be seen in figure 1. The ETF’s base currency is US Dollars, but it is quoted in Australian Dollars. This means the price is being converted from US Dollars to Australian Dollars. If the price of the AUD rises compared to the USD, the USD is able to buy less AUD when the conversion occurs. This in turn reduces the value of the ETF.

Figure 1 – GOLD ETF Trading Data

Trading data and quotation

Primary Quotation Australian Securities Exchange (ASX)
Trading Normal exchange hours
NAV Daily NAV at
Approximate price 1/10th of one oz of gold
Base currency USD (no hedge)
Minimum investment 1 security
Security & trading codes
Quotation Australia
Quotation currency A$
Exchange code GOLD
SEDOL 6605528
Bloomberg GOLD AU <Eq>
Reuters GOLD.AX


Because of the AUD strength during 2009, GOLD lost 4.1% while gold futures gained 24.14% for the year, close to close.

Those holding gold futures on the other hand did make money as it is only the margin held that is affected by the exchange rate movement. Again excluding any costs/losses associated with roll-over, US$21,350 would have been made from the close of 2008 to the close of 2009. This converted back to A$19,155. The initial margin of US $5,500 was worth A$7,846 at entry and A$6,130 at exit. This translates to a gain of A$17,439.

This really highlights the dangers posed by some ETF products in terms of them not working the way you might expect or allowing you the exposure you expect. It is also interesting to note that the PDF on the GOLD ETF stops its performance simulation in 2009.

Chart 2 – Simulated ETF Performance 2004 to 2009

click chart for more detail
click to enlarge


I’ve spoken in the past about similar exchange rate issues as well as situations where both ‘short’ and ‘long’ style funds underperform the market they are based. This simply isn’t something you would expect when making an investment decision, but it can happen. More on this can be found in another previous article Exchange Traded Fun from Trading Tutors Issue #337, 4th December 2009.

The main thing is to ensure that before buying an ETF, check its specifications and performance compared to the market/s it is designed to replicate.

Happy Trading


Jordan Craw